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FORM 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 1, 2017

Commission File Number: 001-36029

Sprouts Farmers Market, Inc.

(Exact name of registrant as specified in its charter)

Delaware

32-0331600

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

5455 East High Street, Suite 111

Phoenix, Arizona 85054

(Address of principal executive offices and zip code)

(480) 814-8016

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

☐ (Do not check if a smaller reporting company)

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of October 31, 2017, the registrant had 133,070,570 shares of common stock, $0.001 par value per share, outstanding.

SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED OCTOBER 1, 2017

TABLE OF CONTENTS

Page

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

1

Consolidated Balance Sheets as of October 1, 2017 (unaudited) and January 1, 2017

1

Consolidated Statements of Operations for the thirteen and thirty-nine weeks ended October 1, 2017 and October 2, 2016 (unaudited)

2

Consolidated Statements of Stockholders’ Equity for the thirty-nine weeks ended October 1, 2017 (unaudited) and the year ended January 1, 2017

3

Consolidated Statements of Cash Flows for the thirty-nine weeks ended October 1, 2017 and October 2, 2016 (unaudited)

4

Notes to Unaudited Consolidated Financial Statements

5

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

17

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

30

Item 4. Controls and Procedures.

30

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

31

Item 1A. Risk Factors.

31

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

32

Item 6. Exhibits.

32

Signatures

33

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains “forward-looking statements” that involve substantial risks and uncertainties. The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (referred to as the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (referred to as the “Exchange Act”), including, but not limited to, statements regarding our expectations, beliefs, intentions, strategies, future operations, future financial position, future revenue, projected expenses, and plans and objectives of management. In some cases, you can identify forward-looking statements by terms such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “project,” “will,” “would,” “should,” “could,” “can,” “predict,” “potential,” “continue,” “objective,” or the negative of these terms, and similar expressions intended to identify forward-looking statements. However, not all forward-looking statements contain these identifying words. These forward-looking statements reflect our current views about future events and involve known risks, uncertainties, and other factors that may cause our actual results, levels of activity, performance, or achievement to be materially different from those expressed or implied by the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section titled “Risk Factors” included in this Quarterly Report on Form 10-Q, our Annual Report on Form 10-K for the fiscal year ended January 1, 2017, and our other filings with the Securities and Exchange Commission. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

As used in this Quarterly Report on Form 10-Q, unless the context otherwise requires, references to the “Company,” “Sprouts,” ”Sprouts Farmers Market,” “we,” “us” and “our” refer to Sprouts Farmers Market, Inc. and, where appropriate, its subsidiaries.

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

October 1, 2017

January 1, 2017

(Unaudited)

ASSETS

Current assets:

Cash and cash equivalents

$

18,892

$

12,465

Accounts receivable, net

23,231

25,228

Inventories

222,216

204,464

Prepaid expenses and other current assets

25,594

21,869

Total current assets

289,933

264,026

Property and equipment, net of accumulated depreciation

690,763

604,660

Intangible assets, net of accumulated amortization

196,556

197,608

Goodwill

368,078

368,078

Other assets

5,886

5,521

Total assets

$

1,551,216

$

1,439,893

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

Accounts payable

$

179,482

$

157,550

Accrued salaries and benefits

41,219

32,859

Other accrued liabilities

60,683

56,376

Current portion of capital and financing lease obligations

8,776

12,370

Total current liabilities

290,160

259,155

Long-term capital and financing lease obligations

126,806

117,366

Long-term debt

349,000

255,000

Other long-term liabilities

126,127

116,200

Deferred income tax liability

42,508

19,263

Total liabilities

934,601

766,984

Commitments and contingencies (Note 8)

Stockholders’ equity:

Undesignated preferred stock; $0.001 par value; 10,000,000

shares authorized, no shares issued and outstanding

Common stock, $0.001 par value; 200,000,000 shares authorized,

133,070,570 and 140,256,313 shares issued and outstanding,

October 1, 2017 and January 1, 2017, respectively

133

140

Additional paid-in capital

614,232

597,269

Retained earnings

2,250

75,500

Total stockholders’ equity

616,615

672,909

Total liabilities and stockholders’ equity

$

1,551,216

$

1,439,893

The accompanying notes are an integral part of these consolidated financial statements.

1

SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

Thirteen Weeks Ended

Thirty-nine Weeks Ended

October 1,

2017

October 2,

2016

October 1,

2017

October 2,

2016

Net sales

$

1,206,059

$

1,035,801

$

3,520,679

$

3,060,685

Cost of sales, buying and occupancy

859,650

744,288

2,494,998

2,156,857

Gross profit

346,409

291,513

1,025,681

903,828

Direct store expenses

250,191

216,932

715,336

617,817

Selling, general and administrative expenses

39,955

29,664

110,312

91,482

Store pre-opening costs

2,456

3,446

10,055

11,625

Store closure and other costs

803

24

992

159

Income from operations

53,004

41,447

188,986

182,745

Interest expense

(5,609

)

(3,723

)

(15,447

)

(10,985

)

Other income

162

135

388

326

Income before income taxes

47,557

37,859

173,927

172,086

Income tax provision

(16,071

)

(13,974

)

(55,186

)

(64,785

)

Net income

$

31,486

$

23,885

$

118,741

$

107,301

Net income per share:

Basic

$

0.23

$

0.16

$

0.87

$

0.72

Diluted

$

0.23

$

0.16

$

0.86

$

0.71

Weighted average shares outstanding:

Basic

134,320

147,743

136,063

149,202

Diluted

136,770

150,024

138,860

151,568

The accompanying notes are an integral part of these consolidated financial statements.

2

SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(UNAUDITED)

(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

Shares

Common

Stock

Additional

Paid In

Capital

Retained

Earnings

Total

Stockholders’

Equity

Balances at January 3, 2016

152,577,884

$

153

$

577,393

$

245,446

$

822,992

Net income

124,306

124,306

Issuance of shares under stock plans

666,841

2,740

2,740

Repurchase and retirement of common

stock

(13,242,483

)

(13

)

(294,252

)

(294,265

)

Excess tax benefit for exercise of options

3,737

3,737

Equity-based compensation

13,399

13,399

Balances at January 1, 2017

140,002,242

$

140

$

597,269

$

75,500

$

672,909

Net income

118,741

118,741

Issuance of shares under stock plans

1,800,157

2

6,638

6,640

Repurchase and retirement of common

stock

(9,136,468

)

(9

)

(191,991

)

(192,000

)

Equity-based compensation

10,325

10,325

Balances at October 1, 2017

132,665,931

$

133

$

614,232

$

2,250

$

616,615

The accompanying notes are an integral part of these consolidated financial statements.

3

SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

Thirty-nine Weeks Ended

October 1,

2017

October 2,

2016

Cash flows from operating activities

Net income

$

118,741

$

107,301

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization expense

70,875

59,997

Accretion of asset retirement obligation and closed store reserve

168

237

Amortization of financing fees and debt issuance costs

347

347

Loss on disposal of property and equipment

820

226

Equity-based compensation

10,325

10,322

Deferred income taxes

23,245

20,119

Changes in operating assets and liabilities:

Accounts receivable

1,660

(1,336

)

Inventories

(17,752

)

(29,784

)

Prepaid expenses and other current assets

(3,734

)

(1,212

)

Other assets

(702

)

(1,480

)

Accounts payable

31,669

24,050

Accrued salaries and benefits

8,360

(4,959

)

Other accrued liabilities and income taxes payable

4,288

(2,762

)

Other long-term liabilities

10,659

14,971

Cash flows from operating activities

258,969

196,037

Cash flows used in investing activities

Purchases of property and equipment

(158,459

)

(142,571

)

Proceeds from sale of property and equipment

30

662

Purchase of leasehold interests

(491

)

Cash flows used in investing activities

(158,429

)

(142,400

)

Cash flows used in financing activities

Proceeds from revolving credit facility

134,000

45,000

Payments on revolving credit facility

(40,000

)

Payments on capital and financing lease obligations

(3,053

)

(3,144

)

Cash from landlords related to financing lease obligations

300

Repurchase of common stock

(192,000

)

(187,836

)

Proceeds from exercise of stock options

6,640

2,616

Excess tax benefit for exercise of stock options

3,948

Cash flows used in financing activities

(94,113

)

(139,416

)

Increase / (Decrease) in cash and cash equivalents

6,427

(85,779

)

Cash and cash equivalents at beginning of the period

12,465

136,069

Cash and cash equivalents at the end of the period

$

18,892

$

50,290

Supplemental disclosure of cash flow information

Cash paid for interest

$

15,052

$

10,942

Cash paid for income taxes

25,710

38,142

Supplemental disclosure of non-cash investing and financing activities

Property and equipment in accounts payable

$

13,476

$

19,919

Property acquired through capital and financing lease obligations

5,512

8,324

The accompanying notes are an integral part of these consolidated financial statements.

4

SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. Basis of Presentation

Sprouts Farmers Market, Inc., a Delaware corporation, through its subsidiaries, operates as a healthy grocery store that offers fresh, natural and organic food through a complete shopping experience that includes fresh produce, bulk foods, vitamins and supplements, packaged groceries, meat and seafood, deli, baked goods, dairy products, frozen foods, beer and wine, natural body care and household items catering to consumers’ growing interest in health and wellness. The “Company” is used to refer collectively to Sprouts Farmers Market, Inc. and unless the context otherwise requires, its subsidiaries.

The accompanying unaudited consolidated financial statements include the accounts of the Company in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial statements and are in the form prescribed by the Securities and Exchange Commission in instructions to Form 10-Q and Rule 10-01 of Regulation S-X. In the opinion of management, the accompanying consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, considered necessary for a fair statement of the Company's financial position, results of operations and cash flows for the periods indicated. All material intercompany accounts and transactions have been eliminated in consolidation. Interim results are not necessarily indicative of results for any other interim period or for a full fiscal year. The information included in these consolidated financial statements and notes thereto should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations included herein and Management’s Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and notes thereto for the fiscal year ended January 1, 2017 (“fiscal year 2016”) included in the Company’s Annual Report on Form 10-K, filed on February 23, 2017.

The year-end balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP.

The Company reports its results of operations on a 52- or 53-week fiscal calendar ending on the Sunday closest to December 31. The fiscal year ending December 31, 2017 (“fiscal year 2017”) is a 52-week year, and fiscal year 2016 was a 52-week year. The Company reports its results of operations on a 13-week quarter, except for 53-week fiscal years.

Certain reclassifications of amounts reported in prior periods have been made to conform with the current period presentation.

The Company has one reportable and one operating segment, healthy grocery stores.

All dollar amounts are in thousands, unless otherwise noted.

5

SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

2. Recently Issued Accounting Pronouncements

Recently Adopted Accounting Pronouncements

In July 2015, the FASB issued ASU No. 2015-11, “Simplifying the Measurement of Inventory.” ASU No. 2015-11 changes the measurement principle for inventory from the lower of cost or market to lower of cost and net realizable value. Net realizable value is defined as the estimated selling prices in the ordinary course of business; less reasonably predictable costs of completion, disposal and transportation. This guidance is effective for the Company for its fiscal year 2017. Adoption of the guidance took place prospectively during 2017, and the adoption did not have a material effect on the Company’s consolidated financial statements or disclosures.

In March 2016, the FASB issued ASU No. 2016-09, “Compensation – Stock Compensation (Topic 718).” This update involves several aspects of the accounting for share-based transactions, including the income tax consequences, classification of awards as either equity or liabilities, how to account for forfeitures, and classification on the statement of cash flows. The amendments in this update are effective for the Company for its fiscal year 2017. As a result of the adoption, the Company recognized excess tax benefits related to the exercise of options in its income tax provision during the thirty-nine weeks ended October 1, 2017 (see Note 6). Prior to the adoption, these items were recorded in Additional Paid-in Capital. The Company has elected to prospectively apply the amendments related to classifying cash flows related to excess tax benefits as an operating activity. During 2017, excess tax benefits were classified as an operating activity on the consolidated statement of cash flows, along with other income tax cash flows. The Company has made a policy election to account for forfeitures as they occur. This election was adopted using a modified retrospective approach resulting in no cumulative effect on retained earnings at the beginning of the period. Prior to the adoption, forfeitures were accounted for using an estimated forfeiture rate.

Recently Issued Accounting Pronouncements Not Yet Adopted

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers.” ASU No. 2014-09 provides guidance for revenue recognition. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under current guidance. These may include identifying performance obligations in the contract, and estimating the amount of variable consideration to include in the transaction price attributable to each separate performance obligation. Subsequent to the initial standards, the FASB has also issued several ASUs to clarify specific revenue recognition topics. This guidance will be effective for the Company for its fiscal year 2018, with early adoption permitted. The Company is currently evaluating the potential impact of this guidance and does not expect this ASU to materially impact the Company’s consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, “Leases (ASC 842).” ASU No. 2016-02 requires lessees to recognize a right-of-use asset and corresponding lease liability for all leases with terms greater than twelve months. Recognition, measurement and presentation of expenses will depend on classification as a finance or operating lease. The new guidance also requires certain additional quantitative and qualitative disclosures. This guidance will be effective for the Company for its fiscal year 2019, with early adoption permitted, and the Company is currently evaluating the potential impact of this guidance. The adoption of this ASU is expected to result in a material increase to the Company’s consolidated balance sheets for right-of-use assets and lease liabilities.

In March 2016, the FASB issued ASU No. 2016-04, “Liabilities-Extinguishments of Liabilities (Subtopic 405-20): Recognition of breakage for certain prepaid stored-value products.” ASU No. 2016-04 provides a narrow scope exception to the guidance in Subtopic 405-20 to require that stored-value breakage be accounted for consistently with the breakage guidance in Topic 606. The amendments in this update contain specific guidance for derecognition of prepaid stored-value product liabilities, thereby eliminating the current and potential future diversity. This guidance will be effective for the Company for its fiscal year 2018, with early adoption permitted. The Company does not expect this ASU to materially impact the Company’s consolidated financial statements.

6

SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” This update provides clarifications on the cash flow classification for eight specific cash flow issues: debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies (COLIs) (including bank-owned life insurance policies (BOLIs)); distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. The guidance will be effective for the Company for its fiscal year 2018, with early adoption permitted. The Company does not expect this ASU to materially impact the Company’s consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” The amendments in this update eliminate the second step of the goodwill impairment test and provide that an entity will apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit's carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The new guidance does not amend the optional qualitative assessment of goodwill impairment. The guidance will be effective for the Company for its fiscal year 2020, with early adoption permitted. The Company is currently evaluating the potential impact of this guidance.

In May 2017, the FASB issued ASU No. 2017-09, “Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting.” The amendments in this update provide guidance about which changes to the terms or conditions of a share-based award require an entity to apply modification accounting in Topic 718. The guidance will be effective for the Company for its fiscal year 2018, with early adoption permitted. The Company does not expect this ASU to materially impact the Company’s consolidated financial statements.

No other new accounting pronouncements issued or effective during the thirty-nine weeks ended October 1, 2017 had, or are expected to have, a material impact on the Company’s consolidated financial statements.

3. Fair Value Measurements

The Company records its financial assets and liabilities in accordance with the framework for measuring fair value in accordance with GAAP. This framework establishes a fair value hierarchy that prioritizes the inputs used to measure fair value:

Level 1: Quoted prices for identical instruments in active markets.

Level 2: Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.

Level 3: Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

Fair value measurements of nonfinancial assets and nonfinancial liabilities are primarily used in the impairment analysis of goodwill, indefinite-lived intangible assets and long-lived assets, and in the valuation of store closure and exit costs.

The determination of fair values of certain tangible and intangible assets for purposes of the Company’s goodwill impairment evaluation as described above was based upon a step zero assessment. Closed facility reserves are recorded at net present value to approximate fair value which is classified as Level 3 in the hierarchy. The estimated fair value of the closed facility reserve is calculated based on the present value of the remaining lease payments and other charges using a weighted average cost of

7

SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

capital, reduced by estimated sublease rentals. The weighted average cost of capital was estimated using information from comparable companies and management’s judgment related to the risk associated with the operations of the stores.

Cash and cash equivalents, accounts receivable, prepaid expenses and other current assets, accounts payable, accrued salaries and benefits and other accrued liabilities approximate fair value because of the short maturity of those instruments. Based on open market transactions comparable to the Credit Facility (as defined in Note 4, “Long-Term Debt”), the fair value of the long-term debt approximates carrying value as of October 1, 2017 and January 1, 2017. The Company’s estimates of the fair value of long-term debt were classified as Level 2 in the fair value hierarchy.

4. Long-Term Debt

A summary of long-term debt is as follows:

As of

Facility

Maturity

Interest Rate

October 1,

2017

January 1,

2017

Senior secured debt

$450.0 million Credit Facility

April 17, 2020

Variable

$

349,000

$

255,000

Total debt

349,000

255,000

Long-term debt

$

349,000

$

255,000

Senior Secured Revolving Credit Facility

On April 17, 2015, the Company’s subsidiary, Sprouts Farmers Markets Holdings, LLC (“Intermediate Holdings”), as borrower, entered into a credit agreement that provides for a revolving credit facility with an initial aggregate commitment of $450.0 million (the “Credit Facility”), which may be increased from time to time pursuant to an expansion set forth in the Credit Facility. The Credit Facility replaced the Company’s existing senior secured credit facility, dated April 23, 2013.

The Company capitalized debt issuance costs of $2.3 million related to the Credit Facility, which are being amortized on a straight-line basis to interest expense over the five-year term of the Credit Facility.

The Credit Facility also provides for a letter of credit subfacility and a $15.0 million swingline facility. Letters of credit issued under the Credit Facility reduce the borrowing capacity of the Credit Facility. Letters of credit totaling $24.8 million have been issued as of October 1, 2017, primarily to support the Company’s insurance programs.

Guarantees

Obligations under the Credit Facility are guaranteed by the Company and all of its current and future wholly-owned material domestic subsidiaries, and are secured by first-priority security interests in substantially all of the assets of the Company and its subsidiary guarantors, including, without limitation, a pledge by the Company of its equity interest in Intermediate Holdings.

Interest and Fees

Loans under the Credit Facility bear interest, at the Company’s option, either at adjusted LIBOR plus 1.50% per annum, or a base rate plus 0.50% per annum. The interest rate margins are subject to adjustment pursuant to a pricing grid based on the Company’s total gross leverage ratio, as defined in the Credit Facility. Under the terms of the Credit Facility, the Company is obligated to pay a commitment fee on the available unused amount of the Credit Facility commitments equal to 0.20% per annum.

Outstanding letters of credit under the Credit Facility are subject to a participation fee of 1.50% per annum and an issuance fee of 0.125% per annum.

8

SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Payments and Borrowings

The Credit Facility is scheduled to mature, and the commitments thereunder will terminate on April 17, 2020, subject to extensions as set forth in the Credit Facility.

The Company may repay loans and reduce commitments under the Credit Facility at any time in agreed-upon minimum principal amounts, without premium or penalty (except LIBOR breakage costs, if applicable).

During fiscal year 2016, the Company borrowed $105.0 million and made a total of $10.0 million of principal payments; resulting in total outstanding debt under the Credit Facility of $255.0 million at January 1, 2017. During the thirteen weeks ended October 1, 2017, the Company borrowed $49.0 million and made a total of $10.0 million of principal payments. During the thirty-nine weeks ended October 1, 2017, the Company borrowed $134.0 million and made a total of $40.0 million of principal payments; resulting in total outstanding debt under the Credit Facility of $349.0 million as of October 1, 2017. The Company has used borrowings under the Credit Facility to assist with its share repurchase programs (see Note 9).

Covenants

The Credit Facility contains financial, affirmative and negative covenants. The negative covenants include, among other things, limitations on the Company’s ability to:

Each of these covenants is subject to customary and other agreed-upon exceptions.

In addition, the Credit Facility requires that the Company and its subsidiaries maintain a maximum total net leverage ratio not to exceed 3.00 to 1.00 and minimum interest coverage ratio not to be less than 1.75 to 1.00. Each of these covenants is tested as of the last day of each fiscal quarter.

The Company was in compliance with all applicable covenants under the Credit Facility as of October 1, 2017.

9

SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

5. Closed Store and Other Costs

The following is a summary of closed store reserve activity during the thirty-nine weeks ended October 1, 2017 and fiscal year 2016:

Thirty-nine

Weeks Ended

Fiscal

Year Ended

October 1, 2017

January 1, 2017

Beginning balance

$

1,083

$

2,017

Additions

Usage

(387

)

(998

)

Adjustments

205

64

Ending balance

$

901

$

1,083

The Closed Store Reserve is included in Other accrued liabilities and Other long-term liabilities in the consolidated balance sheets. Usage relates to lease payments made during the period for closed stores.

During August and September 2017, 14 of our stores in Texas, Florida and Georgia were affected by Hurricanes Harvey and Irma. While physical damage was minimal, these stores experienced, to varying degrees, loss of perishable inventory, additional expenses to clean up and power stores, and a loss of business while closed. Actual costs incurred, not including the impact of lost sales, are estimated to be $1.0 million, with an estimated insurance recovery of $0.3 million for these costs. We are pursuing additional recovery under our business interruption and other insurance policy provisions; however, any additional recoveries are not expected to be material.

6. Income Taxes

The Company’s effective tax rate for the thirteen weeks ended October 1, 2017 and October 2, 2016 was 33.8% and 36.9%, respectively. The decrease in the effective tax rate is primarily due to tax return to provision adjustments for the 2016 income tax return.

The Company’s effective tax rate for the thirty-nine weeks ended October 1, 2017 and October 2, 2016 was 31.7% and 37.7%, respectively. The decrease in the effective tax rate is primarily related to recognition of excess tax benefits related to the exercise or vesting of equity-based awards in the income tax provision. See ASU 2016-09, Compensation – “Stock Compensation (Topic 718)” under Recently Adopted Accounting Pronouncements (Note 2).

Excess tax benefits associated with share-based payment awards are recognized as income tax expense or benefit in the income statement. The tax effects of exercised or vested awards are treated as discrete items in the reporting period in which they occur.

The income tax benefits resulting from equity-based awards were $0.2 million for the thirteen weeks ended October 1, 2017. The income tax benefits resulting from the equity-based awards for the thirteen weeks ended October 2, 2016 were $0.2 million and recorded in Additional Paid-in Capital.

The income tax benefits resulting from equity-based awards were $8.4 million for the thirty-nine weeks ended October 1, 2017. The income tax benefits resulting from equity-based awards for the thirty-nine weeks ended October 2, 2016 were $3.9 million and recorded in Additional Paid-in Capital.

7. Related-Party Transactions

A member of the Company’s board of directors is an investor in a company that is a supplier of coffee to the Company for resale. During the thirteen weeks ended October 1, 2017 and October 2, 2016, purchases from this supplier were $2.7 million and $2.1 million, respectively. During the thirty-nine weeks ended October 1, 2017 and October 2, 2016, purchases from this supplier were $8.1 million and $7.3

10

SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

million, respectively. The Company had recorded accounts payable due to this vendor of $0.7 million, as of both October 1, 2017 and October 2, 2016, respectively.

The Company’s former Executive Chairman of the Board has been the chief executive officer, an equity investor, and lender to a technology supplier to the Company. During the thirteen weeks ended October 1, 2017 and October 2, 2016, purchases from this supplier and its predecessors were $1.6 million and $2.2 million, respectively. During the thirty-nine weeks ended October 1, 2017 and October 2, 2016, purchases from this supplier and its predecessors were $5.2 million and $6.0 million, respectively. As of October 1, 2017, and October 2, 2016, the Company had recorded accounts payable due to the supplier of $0.2 million and $0.5 million, respectively.

8. Commitments and Contingencies

The Company is exposed to claims and litigation matters arising in the ordinary course of business and uses various methods to resolve these matters that are believed to best serve the interests of the Company’s stakeholders. The Company’s primary contingencies are associated with self-insurance obligations. Self-insurance liabilities require significant judgment and actual claim settlements and associated expenses may differ from the Company’s current provisions for loss.

Securities Action

On March 4, 2016, a complaint was filed in the Superior Court for the State of Arizona against the Company and certain of its directors and officers on behalf of a purported class of purchasers of shares of the Company’s common stock in the Company’s underwritten secondary public offering which closed on March 10, 2015 (the “March 2015 Offering”). The complaint purports to state claims under Sections 11, 12 and 15 of the Securities Act of 1933, based on an alleged failure by the Company to disclose adequate information about produce price deflation in the March 2015 Offering documents. The complaint seeks damages on behalf of the purported class in an unspecified amount, rescission, and an award of reasonable costs and attorneys’ fees. After removal to federal court, the plaintiffs sought remand, which the court granted in March 2017. The Company has appealed the order granting remand to the Ninth Circuit Court of Appeals. On May 25, 2017, the Company filed a Motion to Dismiss in the Superior Court for the State of Arizona, which the court granted in part and denied in part by order entered August 30, 2017. The Company answered the complaint on September 28, 2017. The Company will continue to defend this case vigorously, but it is not possible at this time to reasonably estimate the outcome of, or any potential liability from, the case.

9. Stockholders’ Equity

Share Repurchases

On November 4, 2015, the Company’s board of directors authorized a $150 million common stock share repurchase program, which was completed during the second quarter of 2016. On September 6, 2016, the Company’s board of directors authorized a $250 million common stock share repurchase program, which was completed during the first quarter of 2017. On February 20, 2017, the Company’s board of directors authorized a new $250 million common stock share repurchase program. The following table outlines the share repurchase programs authorized by the Board, and the related repurchase activity and available authorization as of October 1, 2017 (in thousands):

The shares under the Company’s repurchase programs may be purchased on a discretionary basis from time to time prior to the applicable expiration date, subject to general business and market conditions and other investment opportunities, through open market purchases, privately negotiated

11

SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

transactions, or other means, including through Rule 10b5-1 trading plans. The board’s authorization of the share repurchase programs does not obligate the Company to acquire any particular amount of common stock, and the repurchase programs may be commenced, suspended, or discontinued at any time. The Company has used borrowings under its Credit Facility to assist with the repurchase programs authorized on September 6, 2016 and February 20, 2017 (see Note 4).

Share repurchase activity under the Company’s repurchase programs for the periods indicated was as follows (total cost in thousands):

Thirteen Weeks Ended

Thirty-nine Weeks Ended

October 1,

2017

October 2,

2016

October 1,

2017

October 2,

2016

Number of common shares acquired

3,249,204

3,189,818

9,136,468

8,169,510

Average price per common share acquired

$

22.16

$

19.93

$

21.01

$

22.99

Total cost of common shares acquired

$

72,000

$

63,572

$

192,000

$

187,836

Shares purchased under the Company’s repurchase programs were subsequently retired.

10. Net Income Per Share

The computation of net income per share is based on the number of weighted average shares outstanding during the period. The computation of diluted net income per share includes the dilutive effect of share equivalents consisting of incremental shares deemed outstanding from the assumed exercise of options, assumed vesting of restricted stock units (“RSUs”), assumed vesting of performance stock awards (“PSAs”), and assumed vesting of restricted stock awards (“RSAs”).

A reconciliation of the numerators and denominators of the basic and diluted net income per share calculations is as follows (in thousands, except per share amounts):

Thirteen Weeks Ended

Thirty-nine Weeks Ended

October 1,

2017

October 2,

2016

October 1,

2017

October 2,

2016

Basic net income per share:

Net income

$

31,486

$

23,885

$

118,741

$

107,301

Weighted average shares outstanding

134,320

147,743

136,063

149,202

Basic net income per share

$

0.23

$

0.16

$

0.87

$

0.72

Diluted net income per share:

Net income

$

31,486

$

23,885

$

118,741

$

107,301

Weighted average shares outstanding - basic

134,320

147,743

136,063

149,202

Dilutive effect of equity-based awards:

Assumed exercise of options to purchase shares

2,128

2,200

2,506

2,278

RSUs

122

28

124

49

RSAs

114

13

102

9

PSAs

86

40

65

30

Weighted average shares and equivalent

shares outstanding

136,770

150,024

138,860

151,568

Diluted net income per share

$

0.23

$

0.16

$

0.86

$

0.71

For the thirteen weeks ended October 1, 2017, the computation of diluted net income per share does not include 1.9 million options and 0.1 million PSAs as those awards would have been antidilutive or were unvested performance awards. For the thirteen weeks ended October 2, 2016, the computation of diluted net income per share does not include 2.2 million options, 0.1 million RSUs, and 0.1 million PSAs as those awards would have been antidilutive or were unvested performance awards.

12

SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

For the thirty-nine weeks ended October 1, 2017, the computation of diluted net income per share does not include 1.9 million options and 0.1 million PSAs as those awards would have been antidilutive or were unvested performance awards. For the thirty-nine weeks ended October 2, 2016, the computation of diluted net income per share does not include 1.3 million options, 0.1 million RSUs and 0.1 million PSAs as those awards would have been antidilutive or were unvested performance awards.

11. Equity-Based Compensation

2013 Incentive Plan

The Company’s board of directors adopted, and its equity holders approved, the Sprouts Farmers Market, Inc. 2013 Incentive Plan (the “2013 Incentive Plan”). The 2013 Incentive Plan became effective July 31, 2013 in connection with the Company’s initial public offering and replaced the 2011 Option Plan (as defined below) (except with respect to outstanding options under the 2011 Option Plan). The 2013 Incentive Plan serves as the umbrella plan for the Company’s equity-based and cash-based incentive compensation programs for its directors, officers and other team members. On May 1, 2015, the Company’s stockholders approved the material terms of the performance goals under the 2013 Incentive Plan for purposes of Section 162(m) of the Internal Revenue Code.

The aggregate number of shares of common stock that may be issued to team members and directors under the 2013 Incentive Plan may not exceed 10,089,072. Shares subject to awards granted under the 2013 Incentive Plan which are subsequently forfeited, expire unexercised or are otherwise not issued will not be treated as having been issued for purposes of the share limitation. As of October 1, 2017, there were 3,686,043 stock awards outstanding and 5,805,674 shares remaining available for issuance under the 2013 Incentive Plan.

2011 Option Plan

In May 2011, the Company adopted the Sprouts Farmers Markets, LLC Option Plan (the “2011 Option Plan”) to provide team members or directors of the Company with options to acquire shares of the Company. The Company had authorized 12,100,000 shares for issuance under the 2011 Option Plan. Options may no longer be issued under the 2011 Option Plan. As of October 1, 2017, there were 2,384,978 options outstanding under the 2011 Option Plan.

Awards Granted

During the thirty-nine weeks ended October 1, 2017, the Company granted the following equity-based compensation awards:

Grant Date

RSUs

PSAs

RSAs

March 2017

325,406

148,944

288,746

May 2017

21,820

August 2017

10,630

Total:

357,856

148,944

288,746

Weighted-average grant date fair value

$

18.66

$

18.11

$

18.11

Stock Options

The Company uses the Black-Scholes option pricing model to estimate the fair value of options at grant date. Options vest in accordance with the terms set forth in the grant letter and vary depending on if they are time-based or performance-based.

Time-based options granted prior to fiscal year 2016 generally vest ratably over a period of 12 quarters (three years), and time-based options granted in fiscal year 2016 vest annually over a period of three years.

13

SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

RSUs

The fair value of RSUs is based on the closing price of the Company’s common stock on the grant date. RSUs generally vest annually over a period of two or three years from the grant date.

PSAs

PSAs granted in fiscal year 2015 are restricted shares that were subject to the Company achieving certain earnings per share performance targets, as well as additional time-vesting conditions. The fair value of PSAs is based on the closing price of the Company’s common stock on the grant date. During the thirty-nine weeks ended October 2, 2016, the performance conditions with respect to 2015 earnings per share were deemed to have been met, and the PSAs will vest 50 percent at each of the second and third anniversary of the grant date. During the thirty-nine weeks ended October 1, 2017, 21,050 of the 2015 PSAs were vested. No PSAs vested during the thirty-nine weeks ended October 2, 2016.

PSAs granted in fiscal year 2016 are restricted shares that are subject to the Company achieving certain earnings before interest and taxes (“EBIT”) performance targets on an annual and cumulative basis over a three-year performance period, as well as additional time-vesting conditions. The fair value of these PSAs is based on the closing price of the Company’s common stock on the grant date. The EBIT target resets annually for each of the three years during the performance period based on a percentage increase over the previous year’s actual EBIT, with each annual performance tranche independent of the previous and next tranche. Cumulative performance is based on the aggregate annual performance targets. Payout of the performance shares will either be 0% or range from 50% to 150% of the target number of shares granted. If the performance conditions are met, PSAs cliff vest on the third anniversary of the grant date. The Company’s board of directors determined that the performance targets for the fiscal year 2016 tranche were not met and 30,981 performance shares were not earned.

PSAs granted in fiscal year 2017 are restricted shares that are subject to the Company achieving certain earnings per share performance targets, as well as additional time-vesting conditions. The fair value of PSAs is based on the closing price of the Company’s common stock on the grant date. Payout of the performance shares will either be 0% or range from 10% to 150% of the target number of shares granted. If the performance conditions are met, PSAs will vest 50 percent at each of the second and third anniversary of the grant date.

RSAs

The fair value of RSAs is based on the closing price of the Company’s common stock on the grant date. RSAs granted prior to January 1, 2017 will vest either ratably over a seven quarter period, beginning on December 31, 2016 or cliff vest on June 30, 2018. RSAs granted in fiscal year 2017 will vest annually over a period of three years from the grant date.

Equity Award Restructuring

In connection with the appointments of the Company’s Chief Executive Officer and President & Chief Operating Officer in August 2015, the Compensation Committee of the Company’s Board of Directors approved a grant of stock options to purchase 1,200,000 and 500,000 shares of the Company’s common stock at an exercise price of $20.98 per share to these officers, respectively (the “August 2015 Options”) pursuant to the 2013 Incentive Plan. The August 2015 Options, taken together with other options granted under the 2013 Incentive Plan to such officers during 2015, exceeded the limit of 500,000 shares which may be granted pursuant to stock options and stock appreciation rights per calendar year to each participant under the 2013 Incentive Plan by 733,439 shares in the case of the Company’s Chief Executive Officer and 33,439 shares in the case of the Company’s President & Chief Operating Officer (the “Excess Options”). Accordingly, the Company has determined, and these officers have acknowledged, that the grants of the Excess Options were null and void.

In order to satisfy the original intent with respect to these individuals’ compensation, on May 23, 2016, the Compensation Committee granted to the Company’s Chief Executive Officer and President & Chief Operating Officer under the 2013 Incentive Plan options to purchase 386,496 and 33,439 shares of

14

SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

the Company’s common stock at an exercise price of $24.48 per share, respectively, and 215,251 and 2,601 RSAs, respectively. The Company recognized compensation expense of $0.9 million during the thirteen week period and $2.9 million during the thirty-nine week period ended October 1, 2017 related to the options and RSAs granted. The Company recognized compensation expense of $1.0 million during the thirteen week period and $1.4 million during the thirty-nine week period ended October 2, 2016 related to the options and RSAs granted.

Equity-based Compensation Expense

Equity-based compensation expense was reflected in the consolidated statements of operations as follows:

Thirteen Weeks Ended

Thirty-nine Weeks Ended

October 1,

2017

October 2,

2016

October 1,

2017

October 2,

2016

Cost of sales, buying and occupancy

$

265

$

244

$

777

$

726

Direct store expenses

349

339

1,098

1,015

Selling, general and administrative expenses

3,471

3,414

8,450

8,581

Equity-based compensation expense before

income taxes

4,085

3,997

10,325

10,322

Income tax benefit

(1,528

)

(1,519

)

(3,863

)

(3,922

)

Net equity-based compensation expense

$

2,557

$

2,478

$

6,462

$

6,400

The following equity-based awards were outstanding as of October 1, 2017 and January 1, 2017:

As of

October 1, 2017

January 1, 2017

(in thousands)

Options

Vested

4,394

5,552

Unvested

609

1,205

RSUs

453

274

PSAs

231

159

RSAs

384

187

As of October 1, 2017, total unrecognized compensation expense related to outstanding equity-based awards was as follows:

As of

October 1, 2017

Options

$

3,629

RSUs

6,803

PSAs

3,171

RSAs

6,106

Total unrecognized compensation expense

$

19,709

As of October 1, 2017, the total remaining weighted average recognition period related to outstanding equity-based awards was as follows:

As of

October 1, 2017

Options

1.0

RSUs

1.7

PSAs

1.7

RSAs

2.0

15

SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

During the thirty-nine weeks ended October 1, 2017 and October 2, 2016, the Company received $6.6 million and $2.6 million, respectively, in cash proceeds from the exercise of options.

16

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion of our financial condition and results of operations together with the consolidated financial statements and related notes that are included elsewhere in this Quarterly Report on Form 10-Q and with our audited consolidated financial statements included in our Annual Report on Form 10-K filed February 23, 2017 with the Securities and Exchange Commission. All dollar amounts included below are in thousands, unless otherwise noted.

Business Overview

Sprouts Farmers Market operates as a healthy grocery store that offers fresh, natural and organic food that includes fresh produce, bulk foods, vitamins and supplements, packaged groceries, meat and seafood, deli, baked goods, dairy products, frozen foods, body care and natural household items catering to consumers’ growing interest in health and wellness. Since our founding in 2002, we have grown rapidly, significantly increasing our sales, store count and profitability. With 282 stores in 15 states as of October 1, 2017, we are one of the largest specialty retailers of fresh, natural and organic food in the United States. As of November 1, 2017, we have grown to 285 stores in 15 states.

At Sprouts, we believe healthy living is a journey and every meal is a choice. The cornerstones of our business are fresh, natural and organic products at compelling prices (which we refer to as “Healthy Living for Less”), an attractive and differentiated shopping experience featuring a broad selection of innovative healthy products, and knowledgeable team members who we believe provide best-in-class customer engagement and product education.

Our Heritage

In 2002, we opened the first Sprouts Farmers Market store in Chandler, Arizona. From our founding in 2002 through October 1, 2017, we continued to open new stores while successfully rebranding 43 Henry’s Farmers Market and 39 Sunflower Farmers Market stores added through acquisitions to the Sprouts banner (referred to as the “Transactions”). These three businesses all trace their lineage back to Henry’s Farmers Market and were built with similar store formats and operations including a strong emphasis on value, produce and service in smaller, convenient locations. The consistency of these formats and operations was an important factor that allowed us to rapidly and successfully rebrand and integrate each of these businesses under the Sprouts banner and on a common platform.

Outlook

We are pursuing a number of strategies designed to continue our growth, including expansion of our store base, continuing positive comparable store sales and growing the Sprouts brand. We intend to continue expanding our store base by pursuing new store openings in our existing markets, expanding into adjacent markets and penetrating new markets. Although we plan to expand our store base primarily through new store openings, we may grow through strategic acquisitions if we identify suitable targets and are able to negotiate acceptable terms and conditions for acquisition. We intend to open 32 new stores in 2017, of which all 32 have opened through November 1, 2017, and approximately 30 new stores per year for the near term.

We also believe we can continue to deliver positive comparable store sales growth by enhancing our core value proposition and distinctive customer-oriented shopping experience, as well as through expanding and refining our fresh, natural and organic product offerings, our targeted and personalized marketing efforts and our in-store education. We are committed to growing the Sprouts brand by supporting our stores, product offerings and corporate partnerships, including the expansion of innovative marketing and promotional strategies through print, digital and social media platforms.

17

Results of Operations for Thirteen Weeks Ended October 1, 2017 and October 2, 2016

The following tables set forth our unaudited results of operations and other operating data for the periods presented. The period-to-period comparison of financial results is not necessarily indicative of financial results to be achieved in future periods. All dollar amounts are in thousands, unless otherwise noted.

Thirteen weeks ended

October 1, 2017

October 2, 2016

Unaudited Consolidated Statement of Operations Data:

Net sales

$

1,206,059

$

1,035,801

Cost of sales, buying and occupancy

859,650

744,288

Gross profit

346,409

291,513

Direct store expenses

250,191

216,932

Selling, general and administrative expenses

39,955

29,664

Store pre-opening costs

2,456

3,446

Store closure and other costs

803

24

Income from operations

53,004

41,447

Interest expense

(5,609

)

(3,723

)

Other income

162

135

Income before income taxes

47,557

37,859

Income tax provision

(16,071

)

(13,974

)

Net income

$

31,486

$

23,885

Weighted average shares outstanding

134,320

147,743

Dilutive effect of equity-based awards

2,450

2,281

Weighted average shares and equivalent shares outstanding

136,770

150,024

Diluted net income per share

$

0.23

$

0.16

Thirteen weeks ended

October 1, 2017

October 2, 2016

Other Operating Data:

Comparable store sales growth

4.6

%

1.3

%

Stores at beginning of period

274

240

Opened

8

10

Stores at end of period

282

250

Comparison of Thirteen Weeks Ended October 1, 2017 to Thirteen Weeks Ended

October 2, 2016

Net sales

Net sales during the thirteen weeks ended October 1, 2017 totaled $1.2 billion, increasing 16% over the same period of the prior fiscal year. Sales growth was primarily driven by solid performance in new stores opened. Comparable stores contributed approximately 87% of net sales for each of the thirteen weeks ended October 1, 2017 and October 2, 2016, respectively.

Cost of sales, buying and occupancy and gross profit

Thirteen weeks ended

October 1, 2017

October 2, 2016

Change

% Change

Net sales

$

1,206,059

$

1,035,801

$

170,258

16

%

Cost of sales, buying and occupancy

859,650

744,288

115,362

15

%

Gross profit

346,409

291,513

54,896

19

%

Gross margin

28.7

%

28.1

%

0.6

%

Gross profit increased during the thirteen weeks ended October 1, 2017 compared to the thirteen weeks ended October 2, 2016 by $54.9 million, of which $47.4 million was as a result of increased sales volume and $7.5 million related to increased margin rate. This improvement was primarily driven by cycling a heightened promotional environment in the third quarter of 2016 in addition to leverage from increased comparable sales.

Direct store expenses

Direct store expenses for the thirteen weeks ended October 1, 2017 increased $33.3 million, including $26.5 million related to stores opened after October 2, 2016, and $6.8 million related to stores operated prior to the same period in 2016. Direct store expenses, as a percentage of net sales, decreased 20 basis points. This leverage is primarily driven by improved comparable sales, as well as operating efficiencies, partially offset by higher benefit costs.

Selling, general and administrative expenses

The increase in selling, general and administrative expenses primarily reflects a $7.1 million increase in bonus and compensation expenses, $1.5 million increase in advertising expenses, and $1.7 million of increases in other corporate expenses, commensurate with store growth and improved company performance.

Store pre-opening costs

Thirteen weeks ended

October 1, 2017

October 2, 2016

Change

% Change

Attributable to 2016 store openings

3,109

(3,109

)

Attributable to 2017 store openings

2,046

337

1,709

Attributable to future store openings

410

410

Total store pre-opening costs

$

2,456

$

3,446

$

(990

)

(29

)%

Percentage of net sales

0.2

%

0.3

%

(0.1

)%

Store pre-opening costs in the thirteen weeks ended October 1, 2017 included $1.9 million related to opening 8 stores during the thirteen weeks ended October 1, 2017 and $0.6 million associated with stores expected to open subsequent to October 1, 2017. Store pre-opening costs in the thirteen weeks ended October 2, 2016 included $2.6 million related to opening 10 stores during that period and $0.8 million associated with stores opened subsequent to quarter end.

Store closure and other costs

Store closure costs for the thirteen weeks ended October 1, 2017 and October 2, 2016 are related to adjustments to the closed store facility reserve primarily related to refinement of estimated subtenant income and other actual occupancy costs from original estimates.

During the third quarter of 2017, 14 of our stores were affected by hurricanes in three states. Although physical damage was minimal, the stores experienced loss of business due to temporary closures, inventory loss and additional expenses to clean up and power the stores. These costs, net of estimated insurance recovery, approximate $0.7 million in the thirteen weeks ended October 1, 2017.

Interest expense

Thirteen weeks ended

October 1, 2017

October 2, 2016

Change

% Change

Capital and financing leases

$

3,033

$

2,708

$

325

12

%

Long-term debt

2,305

786

1,519

193

%

Deferred financing costs / Original issuance

discount

116

116

0

%

Other

155

113

42

37

%

Total Interest Expense

$

5,609

$

3,723

$

1,886

51

%

The increase in interest expense is primarily due to the higher principal balance on the Credit Facility for borrowing to support our share repurchase program, combined with the slightly higher interest rate on our Credit Facility for the thirteen weeks ended October 1, 2017.

Income tax provision

Income tax provision increased to $16.1 million for the thirteen weeks ended October 1, 2017 from $14.0 million for the thirteen weeks ended October 2, 2016, primarily related to an increase in income before taxes. Our effective income tax rate decreased to 33.8% in the thirteen weeks ended October 1, 2017 from 36.9% in the thirteen weeks ended October 2, 2016. The decrease in the effective tax rate was primarily due to tax return to provision adjustments for the 2016 income tax return.

Net income

Net income as a percentage of net sales increased primarily due to higher sales and margins combined with a lower effective tax rate, offset in part by higher interest expense associated with the drawdown on our Credit Facility in connection with the stock buyback program.

Diluted earnings per share

The increase in diluted earnings per share of $0.07 was driven by the increase in net income as well as fewer diluted shares outstanding compared to the prior year, due to the share repurchase program.

21

Results of Operations for Thirty-nine Weeks Ended October 1, 2017 and October 2, 2016

The following tables set forth our unaudited results of operations and other operating data for the periods presented. The period-to-period comparison of financial results is not necessarily indicative of financial results to be achieved in future periods. All dollar amounts are in thousands, unless otherwise noted.

Thirty-nine Weeks Ended

October 1, 2017

October 2, 2016

Unaudited Consolidated Statement of Operations Data:

Net sales

$

3,520,679

$

3,060,685

Cost of sales, buying and occupancy

2,494,998

2,156,857

Gross profit

1,025,681

903,828

Direct store expenses

715,336

617,817

Selling, general and administrative expenses

110,312

91,482

Store pre-opening costs

10,055

11,625

Store closure and other costs

992

159

Income from operations

188,986

182,745

Interest expense

(15,447

)

(10,985

)

Other income

388

326

Income before income taxes

173,927

172,086

Income tax provision

(55,186

)

(64,785

)

Net income

$

118,741

$

107,301

Weighted average shares outstanding

136,063

149,202

Dilutive effect of equity-based awards

2,797

2,366

Weighted average shares and equivalent shares outstanding

138,860

151,568

Diluted net income per share

$

0.86

$

0.71

Thirty-nine Weeks Ended

October 1, 2017

October 2, 2016

Other Operating Data:

Comparable store sales growth

2.4

%

3.4

%

Stores at beginning of period

253

217

Opened

29

33

Stores at end of period

282

250

Comparison of Thirty-nine Weeks Ended October 1, 2017 to Thirty-nine Weeks Ended

October 2, 2016

Net sales

Net sales during the thirty-nine weeks ended October 1, 2017 totaled $3.5 billion, increasing 15% over the same period of the prior fiscal year. Sales growth was primarily driven by solid performance in new stores opened. Comparable stores contributed approximately 87% of net sales for the thirty-nine weeks ended October 1, 2017 and approximately 88% for the same period of the prior fiscal year.

Cost of sales, buying and occupancy and gross profit

Thirty-nine Weeks Ended

October 1, 2017

October 2, 2016

Change

% Change

Net sales

$

3,520,679

$

3,060,685

$

459,994

15

%

Cost of sales, buying and occupancy

2,494,998

2,156,857

338,141

16

%

Gross profit

1,025,681

903,828

121,853

13

%

Gross margin

29.1

%

29.5

%

(0.4

)%

Gross profit increased during the thirty-nine weeks ended October 1, 2017 compared to the thirty-nine weeks ended October 2, 2016 by $121.9 million, primarily as a result of increased sales volume. Gross margin decreased due to the competitive environment, primarily in the first half of 2017, as well as higher occupancy costs.

Direct store expenses

Direct store expenses for the thirty-nine weeks ended October 1, 2017 increased $97.5 million. Direct store expenses, as a percentage of net sales, increased 10 basis points. This primarily reflects higher payroll and benefit costs, in part due to deleverage of fixed costs associated with lower comparable store sales growth, partially offset by other operating efficiencies.

Selling, general and administrative expenses

The increase in selling, general and administrative expenses primarily reflects an $8.1 million increase in compensation expense, a $3.7 million increase in regional expenses, a $3.5 million increase in advertising to support growth and $3.5 million of increases in other corporate expenses, commensurate with store growth and improved company performance.

Store pre-opening costs

Thirty-nine weeks ended

October 1, 2017

October 2, 2016

Change

% Change

Attributable to 2016 store openings

11,186

(11,186

)

Attributable to 2017 store openings

9,210

439

8,771

Attributable to future store openings

845

845

Total store pre-opening costs

$

10,055

$

11,625

$

(1,570

)

(14

)%

Percentage of net sales

0.3

%

0.4

%

(0.1

)%

Store pre-opening costs in the thirty-nine weeks ended October 1, 2017 included $9.0 million related to opening 29 stores during the thirty-nine weeks ended October 1, 2017 and $1.0 million associated with stores expected to open subsequent to October 1, 2017. Store pre-opening costs in the thirty-nine weeks ended October 2, 2016 included $10.6 million related to opening 33 stores during that period and $1.0 million associated with stores opened subsequent to quarter end.

Store closure and other costs

Store closure costs for the thirty-nine weeks ended October 1, 2017 and October 2, 2016 are related to adjustments to the closed facility reserve primarily related to refinement of estimated subtenant income and other actual occupancy costs from original estimates.

During the third quarter of 2017, 14 of our stores were affected by hurricanes in three states. Although physical damage was minimal, the stores experienced loss of business due to temporary closures, inventory loss and additional expenses to clean up and power the stores. These costs, net of estimated insurance recovery, approximate $0.7 million in the thirty-nine weeks ended October 1, 2017.

Interest expense

Thirty-nine weeks ended

October 1, 2017

October 2, 2016

Change

% Change

Capital and financing leases

$

8,715

$

8,048

$

667

8

%

Long-term debt

5,919

2,247

3,672

163

%

Deferred financing costs / Original issuance

discount

347

347

0

%

Other

466

343

123

36

%

Total Interest Expense

$

15,447

$

10,985

$

4,462

41

%

The increase in interest expense is primarily due to the higher principal balance on the Credit Facility for borrowing to support our share repurchase program combined with the slightly higher interest rate on our Credit Facility for the thirty-nine weeks ended October 1, 2017.

Income tax provision

Income tax provision decreased to $55.2 million for the thirty-nine weeks ended October 1, 2017 from $64.8 million for the thirty-nine weeks ended October 2, 2016, primarily related to the recognition of excess tax benefits related to the exercise or vesting of equity-based awards in the income tax provision. Our effective income tax rate decreased to 31.7% in the thirty-nine weeks ended October 1, 2017 from 37.7% in the thirty-nine weeks ended October 2, 2016 primarily related to recognition of excess tax benefits related to the exercise or vesting of equity-based awards in the income tax provision. See ASU 2016-09, Compensation – “Stock Compensation (Topic 718)” under Recently Adopted Accounting Pronouncements (Note 2).

Net income

Net income increased $11.4 million as a result of increased sales, but decreased slightly as a percentage of net sales due to lower gross margin and higher payroll expenses partially offset by a lower effective tax rate.

Diluted earnings per share

The increase in diluted earnings per share of $0.15 was driven by the increase in net income as well as fewer diluted shares outstanding compared to the prior year, due to the share repurchase program.

Return on Invested Capital

In addition to reporting financial results in accordance with generally accepted accounting principles, or GAAP, we provide information regarding Return on Invested Capital (referred to as “ROIC”) as additional information about our operating results. ROIC is a non-GAAP financial measure and should not be reviewed in isolation or considered as a substitute for our financial results as reported in accordance with GAAP. ROIC is an important measure used by management to evaluate our investment returns on capital and provides a meaningful measure of the effectiveness of our capital allocation over time.

We define ROIC as net operating profit after tax (referred to as “NOPAT”), including the effect of capitalized operating leases, divided by average invested capital. Operating leases are capitalized as part of the ROIC calculation to control for differences in capital structure between us and our competitors. Capitalized operating lease interest represents this adjustment to NOPAT and is calculated by the hypothetical capitalization of our operating leases, using eight times our trailing twelve months rent expense and an interest rate factor of seven percent. Operating leases are determined as the trailing twelve months’ rent expense times a factor of eight. Invested capital reflects a trailing twelve-month average.

As numerous methods exist for calculating ROIC, our method may differ from methods used by other companies to calculate their ROIC. It is important to understand the methods and the differences in those methods used by other companies to calculate their ROIC before comparing our ROIC to that of other companies.

Our calculation of ROIC for the fiscal periods indicated was as follows:

Rolling Four Quarters Ended

October 1, 2017

October 2, 2016 (4)

(dollars in thousands)

Net income (1)

$

135,745

$

135,518

Interest expense, net of tax (2)

11,770

9,580

Net operating profit after tax (NOPAT)

$

147,515

$

145,098

Total rent expense, net of tax (2)

78,113

63,983

Estimated depreciation on capitalized operating leases, net of tax (2)

(34,370

)

(28,153

)

Estimated interest on capitalized operating leases, net of tax (2) (3)

43,743

35,830

NOPAT, including effect of capitalized operating leases

$

191,258

$

180,928

Average working capital

15,093

103,321

Average property and equipment

641,451

522,183

Average other assets

574,281

586,777

Average other liabilities

(149,039

)

(115,077

)

Average invested capital

$

1,081,786

$

1,097,204

Average estimated asset base of capitalized operating leases

930,645

814,532

Average invested capital, including the effect of capitalized

operating leases

$

2,012,431

$

1,911,736

ROIC

13.6

%

13.2

%

ROIC, including the effect of capitalized operating leases

9.5

%

9.5

%

Liquidity and Capital Resources

The following table sets forth the major sources and uses of cash for each of the periods set forth below, as well as our cash and cash equivalents at the end of each period (in thousands):

Thirty-nine weeks ended

October 1, 2017

October 2, 2016

Cash and cash equivalents at end of period

$

18,892

$

50,290

Cash flows from operating activities

$

258,969

$

196,037

Cash flows used in investing activities

$

(158,429

)

$

(142,400

)

Cash flows used in financing activities

$

(94,113

)

$

(139,416

)

We have generally financed our operations principally through cash generated from operations and borrowings under our credit facilities. Our primary uses of cash are for purchases of inventory, operating expenses, capital expenditures primarily for opening new stores, remodels and maintenance, repurchases of our common stock and debt service. We believe that our existing cash and cash equivalents, and cash anticipated to be generated from operations will be sufficient to meet our anticipated cash needs for at least the next 12 months, and we may continue to use borrowings under our Credit Facility to fund our share repurchase programs. Our future capital requirements will depend on many factors, including new store openings, remodel and maintenance capital expenditures at existing stores, store initiatives and other corporate capital expenditures and activities. Our cash and cash

26

equivalents position benefits from the fact that we generally collect cash from sales to customers the same day or, in the case of credit or debit card transactions, within days from the related sale.

Operating Activities

Cash flows from operating activities increased $63.0 million to $259.0 million for the thirty-nine weeks ended October 1, 2017 compared to $196.0 million for the thirty-nine weeks ended October 2, 2016. The cash flows from operating activities came from net income adjusted primarily for non-cash expenses of depreciation and amortization, deferred income taxes, equity-based compensation and changes in working capital.

Cash flows provided by operating activities from changes in working capital was $34.4 million in the thirty-nine weeks ended October 1, 2017, compared to $2.5 million use of cash in the thirty-nine weeks ended October 2, 2016. The increase in cash flows from operating activities for changes in working capital in the thirty-nine weeks ended October 1, 2017, compared to the thirty-nine weeks ended October 2, 2016, was primarily due to higher net income combined with working capital improvements as a result of operating efficiencies achieved through our strategic initiatives, and higher payroll and bonus accruals in line with improved performance and company growth.

Investing Activities

Cash flows used in investing activities were $158.4 million, and $142.4 million for the thirty-nine weeks ended October 1, 2017 and the thirty-nine weeks ended October 2, 2016, respectively. The increase in cash flows used in investing activities is primarily due to additional purchases of property and equipment, due to the addition of 32 stores in the last twelve months. Cash flows used in investing activities consist primarily of capital expenditures in new stores, including leasehold improvements and store equipment, capital expenditures to maintain the appearance of our stores, sales enhancing initiatives and other corporate investments.

We expect capital expenditures to be approximately $170 million in fiscal 2017, including expenditures incurred to date, net of estimated landlord tenant improvement allowances, primarily to fund investments in new stores, remodels, maintenance capital expenditures and corporate capital expenditures. We expect to fund our capital expenditures with cash on hand, cash generated from operating activities and, if required, borrowings under our Credit Facility.

Financing Activities

Cash flows used in financing activities were $94.1 million for the thirty-nine weeks ended October 1, 2017 compared to $139.4 million for the thirty-nine weeks ended October 2, 2016. During the thirty-nine weeks ended October 1, 2017, cash flows used in financing activities consisted of $192.0 million for stock repurchases, $40.0 million in payments on our Credit Facility, $3.0 million cash paid for capital and financing lease obligations, partially offset by $134.0 million of borrowings on the Credit Facility, $6.6 million in proceeds from the exercise of stock options and $0.3 million of cash received from landlords related to financing lease obligations.

During the thirty-nine weeks ended October 2, 2016, cash flows used in financing activities consisted of $187.8 million for stock repurchases and $3.1 million cash paid for capital and financing lease obligations, partially offset by $45.0 million of borrowings on the Credit Facility $3.9 million of excess tax benefits from the exercise of stock options and $2.6 million in proceeds from the exercise of stock options.

Long-Term Debt and Credit Facilities

Long-term debt increased $144.0 million to $349.0 million as of October 1, 2017, compared to October 2, 2016 primarily related to borrowings to fund our share repurchase programs.

See Note 4 “Long-Term Debt” of our unaudited consolidated financial statements for a description of our Credit Facility.

Share Repurchase Program

On November 4, 2015, our board of directors authorized a $150 million common stock share repurchase program, which was completed during the second quarter of 2016. On September 6, 2016, our board of directors authorized a $250 million share repurchase program for our common stock, which was completed during the first quarter of 2017. On February 20, 2017, our board of directors authorized a new $250 million share repurchase program for our common stock. The following table outlines the share repurchase programs authorized by the Board, and the related repurchase activity and available authorization as of October 1, 2017.

The shares under the repurchase programs may be purchased on a discretionary basis from time to time prior to the applicable expiration date, subject to general business and market conditions and other investment opportunities, through open market purchases, privately negotiated transactions, or other means, including through Rule 10b5-1 trading plans. The board’s authorization of the share repurchase programs does not obligate us to acquire any particular amount of common stock, and the repurchase programs may be commenced, suspended, or discontinued at any time. We have used borrowings under our Credit Facility to assist with the repurchase program authorized on September 6, 2016 and February 20, 2017.

Share repurchase activity under our repurchase programs for the periods indicated was as follows:

Thirteen Weeks Ended

Thirty-nine Weeks Ended

October 1,

2017

October 2,

2016

October 1,

2017

October 2,

2016

Number of common shares acquired

3,249,204

3,189,818

9,136,468

8,169,510

Average price per common share acquired

$

22.16

$

19.93

$

21.01

$

22.99

Total cost of common shares acquired

$

72,000

$

63,572

$

192,000

$

187,836

Shares purchased under our repurchase programs were subsequently retired.

Contractual Obligations

We are committed under certain capital leases for the rental of certain land and buildings and certain operating leases for rental of facilities and equipment. These leases expire or become subject to renewal clauses at various dates through 2035.

The following table summarizes our lease obligations as of October 1, 2017, and the effect such obligations are expected to have on our liquidity and cash flow in future periods:

Payments Due by Period

Total

Less Than

1 Year

1-3 Years

4-5 Years

More Than

5 Years

(in thousands)

Capital and financing lease obligations (1)

$

142,221

$

17,018

$

33,472

$

31,175

$

60,556

Operating lease obligations (1)

1,590,493

138,329

302,886

287,356

861,922

Totals

$

1,732,714

$

155,347

$

336,358

$

318,531

$

922,478

We have other contractual purchase commitments and debt, which were presented under Contractual Obligations in our Annual Report on Form 10-K for the fiscal year ended January 1, 2017. There have not been material changes to our contractual purchase commitments since that filing through October 1, 2017. As of October 1, 2017, the outstanding balance on the Credit Facility was $349.0 million, as discussed in Note 4 to the unaudited consolidated financial statements.

We periodically make other commitments and become subject to other contractual obligations that we believe to be routine in nature and incidental to the operation of the business. Management believes that such routine commitments and contractual obligations do not have a material impact on our business, financial condition or results of operations.

Off-Balance Sheet Arrangements

We do not engage in any off-balance sheet financing activities, nor do we have any interest in entities referred to as variable interest entities.

Impact of Inflation and Deflation

Inflation and deflation in the prices of food and other products we sell may periodically affect our sales, gross profit and gross margin. The short-term impact of inflation and deflation is largely dependent on whether or not the effects are passed through to our customers, which is subject to competitive market conditions.

Food inflation and deflation is affected by a variety of factors and our determination of whether to pass on the effects of inflation or deflation to our customers is made in conjunction with our overall pricing and marketing strategies, as well as our competitors’ responses. Although we may experience periodic effects on sales, gross profit, gross margins and cash flows as a result of changing prices, we do not expect the effect of inflation or deflation to have a material impact on our ability to execute our long-term business strategy.

Critical Accounting Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with GAAP. These principles require us to make estimates and judgments that affect the reported amounts of assets, liabilities, sales and expenses, cash flow and related disclosure of contingent assets and liabilities. Our estimates include, but are not limited to, those related to inventory, lease assumptions, self-insurance reserves, sublease assumptions for closed stores, goodwill and intangible assets, impairment of long-lived assets, fair values of equity-based awards and income taxes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates. To the extent that there are material differences between these estimates and our actual results, our future financial statements will be affected.

There have been no substantial changes to these estimates or the policies related to them during the thirty-nine weeks ended October 1, 2017. For a full discussion of these estimates and policies, see “Critical Accounting Estimates” in Item 7 of our Annual Report on Form 10-K for the fiscal year ended January 1, 2017.

Recently Issued Accounting Pronouncements

See Note 2 “Recently Issued Accounting Pronouncements” to our accompanying unaudited consolidated financial statements contained in this Quarterly Report on Form 10-Q.

We have determined that all other recently issued accounting standards will not have a material impact on our financial statements, or do not apply to our operations.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

As described in Note 4, “Long-Term Debt” to our unaudited consolidated financial statements located elsewhere in this Quarterly Report on Form 10-Q, we have a Credit Facility that bears interest at a rate based in part on LIBOR. Accordingly, we are exposed to fluctuations in interest rates. Based on the $349.0 million principal outstanding under our Credit Facility as of October 1, 2017, each hundred basis point change in LIBOR would result in a change in interest expense by $3.5 million annually.

This sensitivity analysis assumes our mix of financial instruments and all other variables will remain constant in future periods. These assumptions are made in order to facilitate the analysis and are not necessarily indicative of our future intentions.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

We maintain a system of disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) designed to ensure that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time period specified in the rules and forms of the Securities and Exchange Commission, and is accumulated and communicated to our management, including our Chief Executive Officer (our principal executive officer) and our Chief Financial Officer (our principal financial officer), as appropriate, to allow timely decisions regarding required disclosure.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures under the Exchange Act as of October 1, 2017, the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of such date, our disclosure controls and procedures were effective.

Changes in Internal Control Over Financial Reporting

During the quarterly period ended October 1, 2017, there were no changes in our internal controls over financial reporting that materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

From time to time we are a party to legal proceedings, including matters involving personnel and employment issues, product liability, personal injury, intellectual property and other proceedings arising in the ordinary course of business, which have not resulted in any material losses to date. Although management does not expect that the outcome in these proceedings will have a material adverse effect on our financial condition or results of operations, litigation is inherently unpredictable. Therefore, we could incur judgments or enter into settlements of claims that could materially impact our results.

Securities Action

On March 4, 2016, a complaint was filed in the Superior Court for the State of Arizona against our company and certain of our directors and officers on behalf of a purported class of purchasers of shares of our common stock in our underwritten secondary public offering which closed on March 10, 2015 (the “March 2015 Offering”). The complaint purports to state claims under Sections 11, 12 and 15 of the Securities Act of 1933, based on an alleged failure by our company to disclose adequate information about produce price deflation in the March 2015 Offering documents. The complaint seeks damages on behalf of the purported class in an unspecified amount, rescission, and an award of reasonable costs and attorneys’ fees. After removal to federal court, the plaintiffs sought remand, which the court granted in March 2017. We have appealed the order granting remand to the Ninth Circuit Court of Appeals. On May 25, 2017, we filed a Motion to Dismiss in the Superior Court for the State of Arizona, which the court granted in part and denied in part by order entered August 30, 2017. We answered the complaint on September 28, 2017. We will continue to defend this case vigorously, but it is not possible at this time to reasonably estimate the outcome of, or any potential liability from, the case.

“Phishing” Scam Actions

In April 2016, four complaints were filed, two in the federal courts of California, one in the Superior Court of California and one in the federal court in the District of Colorado, each on behalf of a purported class of our current and former team members whose personally identifiable information (referred to as “PII”) was inadvertently disclosed to an unauthorized third party that perpetrated an email “phishing” scam against one of our team members. The complaints allege we failed to properly safeguard the PII in accordance with applicable law. The complaints seek damages on behalf of the purported class in unspecified amounts, attorneys’ fees and litigation expenses. In June 2016, a motion was filed before the Judicial Panel on Multidistrict Litigation (referred to as “JPML”) to transfer and consolidate all four of the cases to the federal court in the District of Arizona. The JPML granted the motion on October 6, 2016. On May 24, 2017, the JPML granted our motion to stay proceedings in the case pending a U.S. Supreme Court ruling which is likely to be dispositive on the question of whether the arbitration agreements signed by each of the named plaintiffs are enforceable; oral argument in this case was heard by the U.S. Supreme Court on October 2, 2017, and we do not expect a decision from the U.S. Supreme Court until Spring 2018. We will continue to defend these cases vigorously, but it is not possible at this time to reasonably estimate the outcome of, or any potential liability from, the cases.

Item 1A. Risk Factors.

Certain factors may have a material adverse effect on our business, financial condition and results of operations. You should carefully consider the risks and uncertainties referenced below, together with all of the other information in this Quarterly Report on Form 10-Q, including our consolidated financial statements and related notes. Any of those risks could materially and adversely affect our business, operating results, financial condition, or prospects and cause the value of our common stock to decline, which could cause you to lose all or part of your investment.

There have been no material changes to the Risk Factors described under “Part I – Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended January 1, 2017.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Issuer Purchases of Equity Securities

The following table provides information about our share repurchase activity during the thirteen weeks ended October 1, 2017.

Period (1)

Total number

of shares

purchased

Average

price paid

per share

Total number of

shares purchased

as part of publicly

announced plans

or programs

Approximate dollar

value of shares

that may yet be

purchased under

the plans or

programs

July 3, 2017 - July 30, 2017

675,727

$

23.01

675,727

$

194,450,000

July 31, 2017 - August 27, 2017

1,017,618

$

24.03

1,017,618

$

170,000,000

August 28, 2017 - October 1, 2017

1,555,859

$

20.57

1,555,859

$

138,000,000

Item 6. Exhibits.

Exhibit

Number

Description

31.1

Certification of Chief Executive Office Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1

Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2

Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS

XBRL Instance Document

101.SCH

XBRL Taxonomy Extension Schema Document

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

SPROUTS FARMERS MARKET, INC.

Date: November 2, 2017

By:

/s/ Bradley S. Lukow

Name:

Bradley S. Lukow

Title:

Chief Financial Officer

(Principal Financial Officer)


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